The Boss Knows Best: Directors of Research and Subordinate Analysts

Abstract

Research departments are managed by Directors of Research (DORs). Subordinate analysts working for higher quality DORs provide superior earnings forecasts that elicit stronger market reactions, better investment recommendations, and have better career outcomes. For the broker, higher quality DORs drive more trading commissions. Economically, analysts benefit the most from DOR-analyst industry alignment resulting from DORs’ former analyst experience. We provide several tests to mitigate endogeneity concerns and explore various mechanisms to explain these results. Overall, our paper identifies a unique channel whereby industry-specific and general human capital of top management filters through to individual subordinates and consequently improves organizational performance.

Keywords: Directors of Research, Analyst Earnings Forecasts, Analyst Recommendations, Broker Resources, Trading Commissions, Industry Experience, Industry Knowledge, Management Access, Human Capital

JEL Classification: G20, G23, G30